Alea Iacta Est – at the expense of the Austrian Taxpayer.

Finally, the Austrian government has decided, after 4 years of inaction and several painful weeks of discussions by everybody and his dog, what to do with the insolvent Hypo Alpe Adria Bank. 17.8 billion Euro worth of “assets” of doubtful quality will be transferred into a limited liability company (“bad bank”), which does not require a bank licence, thus is not liable to capital requirements. These assets shall be disposed of over a still-to-be determined period of time. The “rest”, 8.3 billion Euro worth, the Balkans part of HAA, will remain a “going concern”, but are under order by the European Commission to be sold by mid-2015.

This solution leaves all the burden on the Austrian taxpayer. Up to now, the government has put 4.8 billion Euros into HAA (of which 1.2 bill are guarantees). How much more the taxpayers will have to put up, will depend on the proceeds of both the Bad Bank assets and the Balkans bank. (Nothing has been said so far on what will happen to the Slovenian part, nothing whether the total Balkan part or national parts individually, in Serbia, Croatia, Bosnia and Montenegro will be put up for sale).

The decision which puts the interests of the stability of the Austrian Banks, the secured and unsecured creditors (the Austrian state of Carinthia guarantees HAA bonds in the amount of 12.5 bill Euros – 6 times its annual budget), the refinancing costs of the federal government and the private sector, the state of Carinthia and that of Bavaria, the former owner of Hypo, ahead of that of taxpayers, is no surprise, if one knows Austrian Realpolitik and the lobbying strengths of the various actors. Estimates by the Austrian National Bank, whose governor headed a government-appointed “Hypo Task Force” suggested that the costs of insolvency of Hypo would be in the order of 26 billion Euros (9 percent of Austrian GDP).

While an insolvency of the nationalized Hypo undoubtedly would have created some of the above risks, their probability and the possible present value of these risks was never discussed, but rather assumed to be 100%. How much might the government’s refinancing costs have increased, how much could have been saved for Austrian taxpayers by putting some of the burden on creditors, what would have been the effects of a Carinthia bankruptcy (there is no legal provision in Austria for a federal state defaulting on its debts or guarantees) – these and other questions were never discussed or answered. Insolvency was ruled out as incurring “incalculable risks” – and that was it.

A realistic assumption of the total costs to taxpayers in the present “solution” runs between 8 bill Euros and 16 billion Euros, between 5% and 10% of the Austrian budget. This is the nominal growth rate of Austrian GDP between 2/3 years. There were long arguments by the government that these costs would not impinge on the Austrian deficit path, since this was defined as the evolution of the “structural” deficit, that yes, the Austrian debt ratio relative to GDP would go up to more than 80%, but that the Maastricht deficit would hardly be affected – all hogwash. No matter what the definition, the Austrian taxpayer will have to pay it all, and suddenly it is recognized that even the Maastricht deficit will go up by 1 percent of GDP in 2015. Are all these extra burdens on the taxpayer not risks – of tax increases and/or expenditure cuts, which should have been weighed against the risks of bank stability? By the way, the rating agencies which followed with incredulity the Austrian discussions during the past weeks have stated that neither the Bad Bank solution nor an orderly insolvency would affect the rating of Austria and its banks.

The governing coalition parties so far have refused to have the Hypo case investigated by a parliamentary special commission. Instead, they have offered to install a “wise men group” – which however has no power to call witnesses, where there is no obligation to speak the truth, etc. This amounts to a democracy scandal which will further alienate citizens and taxpayers from the political process and reduce confidence in politics. It also points once more to a lack of accountability of government, vis-à-vis the parliament and the public. So far the Austrian President, as guardian of the constitution, has not encouraged such accountability.

There is a long list of government failure: from letting a megalomaniac state governor use “his” bank as a cash machine for “bread and games” expenditures, a failure of both the banking supervision authorities and the federal government; from the “emergency nationalization” in 2009 (after Carinthia had sold the bank to Bayrische Landesbank in 2007 and declaring itself “rich” after the sale) and the covenants accompanying this “purchase”; from neglecting to decide on what to do with its bank for four years, while non-performing loans were piling up and a swath of criminal activities were uncovered; to the repeated change in management and board of the bank, to an appointment of a legally dubious “task force”; to the insufficiently argued Bad Bank solution at the expense of the Austrian taxpayer.

What worries me most is not the Hypo scandal itself, but the extreme degree of non-professionalism with which the government handled this case. This is even more worrying as there is a number of smaller, but similar cases for which the government has responsibility. The only ray of hope in this sorry development is that the Austrian public, normally complacent, has been alarmed and will keep its government under closer surveillance than up to now. Let us see whether this will help.


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